All Forum Posts by: John Mattox

They are not necessary in the same way liability insurance is not necessary. You might get away without having good advisors but you might not. If you lose that bet it will cost you a ton more than document review and accounting would. People have different approaches but I would be sure you are doing it right and CYA.

Here is a decent article on the subject http://www.mtgprofessor.com/A%20-%20Wrap-Around%20Mortgages/mortgage. With more details regarding your situation a more direct answer could be given.

Because you are buying outright you can take the HELOC funds and invest them into your LLC. Then the LLC will buy the properties with cash. No due on sale issues no need to deed properties back and forth. Why would you not go this route?

It could work out fine on paper especially if you hire an attorney to draw up the papers. That said, as others have eluded to, if he cannot pay his taxes, why would you expect him to pay the note to you and future taxes? If he does not pay you you will likely lose a friend and have the hassle of foreclosing on the property. I would steer clear of this one.

A HELOC from equity in another property is likely your cheapest option to borrow the funds unless you have some cash value life insurance with favorable terms on borrowing from the cash value in the policy. In the HELOC you will have payments during the rehab but your total borrowing costs will be low relative to other options like hard money. Also you should consider hiring out the most time consuming work. $40K in 4 months may be better than $45K in 8 months. This is especially true if your timeline will have you ready to sell in the slower/colder months of the year. - John

Ideally, for a variety of reasons, I recommend you form your entity first then buy the property. You can find a bank that will lend to your LLC as long as you personally guarantee it. You will have to put more money down and take a shorter term. That can be undesirable but in reality saves you money in interest long term. If the bank charges a higher rate on the loan, it is likely a wash long term. Buying in your name with a personal mortgage and personal insurance then transferring to your entity can certainly cause issue in both the financing and insurance areas. Many investors fly by the seat of their pants and it works well for them...until it doesn't. In that regard it is a personal choice based on tolerance for risk and willingness to deal with potential hassles.

Also consider how competitive your local market is. I recently bought an REO for substantially more than the asking price (but still under county appraisal). My market is hot. There were more than 10 parties making bids on the property within the first week. As mentioned above factors other than the asking price should inform your offer.

The COI rules you asked about are all about holding him to a high bar in dealing with you. For what its worth look to rules 1.7 & 1.8 here: http://www.nycourts.gov/rules/jointappellate/ny-ru...

As noted above by Javi, he can not represent you in the deal where you buy his building from him but otherwise the rules basically require that he, in engaging in business transactions with you, must treat you with the utmost fairness. Most sellers of real estate you might buy from would not have that hanging over their head. If it is otherwise a good deal I would not pass it up because he represents you in other matters.

- John

Matthew is certainly right on this one.  To answer your basic questions though in general terms:

If you have a LLC to hold the building, how do you have another company to operate it?

The operating company is simply another company(entity not necessarily corp.).  So Holding Co. contracts with Operating Co. to manage the property. It might be helpful to think through it as though Operating Co. is just another local business, like any property management company you might hire to manage your properties.

What would the income be for that operating company?

The income for the operating company is what Holding Co. pays Operating Co. to manage the property.

You should hire a local qualified/specialized real estate attorney to represent your interests in the transaction and discuss the specifics of your deal.

- John